Wednesday, September 28, 2011

Tuesday, September 27, 2011


We hear it all the time. Let's cut taxes and deregulate so that entrepreneurs can work their magic. Only then can we spur entrepreneurialism and rejuvenate America's markets, the argument goes.

Well, guess what? Creativity and prosperous markets were with us long before Ronald Reagan and the current wave of deregulation, tax breaks for the rich, and other legislative gifts to America's financial mandarins happened. In fact, I'm pretty sure that Bill Gates and Steven Jobs weren't sitting around their garages waiting for tax cuts and deregulation to come up with their Microsoft and Apple ideas (go ahead, ask them).

Inventions and creativity have been happening since the dawn of time. History tells us this. Initiative and innovation are human constants, and depend on many factors that go beyond tax cuts and deregulation.

Benjamin Franklin's lightening rod, penicillin, and Jonas Salk's polio vaccine are examples of this. The influenza outbreak during WWI stirred curiosity and spurred some of the greatest publicly funded medical research that the world has ever seen. History is full of many other examples where phenomenal breakthroughs were made for reasons beside monetary gain.

The thing we want to keep in mind is that people invent and do things for reasons that go beyond the profit motive or tax cuts. Think about the things that were invented in the 1940s and 1950s when the tax rate on America's wealthiest wage earners was 90 percent.

Whether it's pride, personal goals, accident, art, nationalism, or simple curiosity, the human experience shows us that tax breaks aren't the only instigator behind human creativity.

Below is a very partial list of creativity and products that were built without the promise of tax breaks, the profit motive, or deregulation.



Do you like ear thermometers, memory foam, scratch resistant lenses, invisible braces, shoe insoles, satellites and long distance communication, ionized adjustable smoke detectors, road safety grooving (which cuts hydroplaning), cordless tools (for Apollo missions), water filters (ionized charcoal), kidney dialysis, cat scans, cancer fighting drugs and shiny hair, and deformable mirrors (which provide 100 times the imaging), among others? Thank NASA for directly building or having a hand in these and more than 6,300 other patented inventions.

But, contrary to common folk wisdom, TANG was not one of NASA's inventions. That's a myth.


The military connection ... Anesthesia (Civil War), nuclear energy, the computer (from code breaking), the internet (cold war invention for use during nuclear war), satellite communications, synthetic rubber, penicillin, jet engines (thank you German military scientists), submarine technology (American Revolution), and Pepto Bismol.

Perhaps the best example of a military-related invention is the story of the most popular gun in the world, the AK-47. Mikhail Kalashnikov, a Russian tank driver came up with the idea for the AK-47 while recovering in a military hospital during World War II. Around the world between 75-100 million AK-47s are in use today, which makes it the most popular gun in the world.

And if we want to stretch it, even the Rosetta Stone was discovered as a result of a military campaign (Napoleon's romp through Egypt). Anthropology and the study of languages haven't been the same since.


Do you like the microwave, Viagra, artificial sweeteners, Popsicles, brandy, Teflon, and penicillin? They were accidents of curiosity. So were Velcro, X-rays, the pacemaker, super glue, and play-doh.

Then we want to keep in mind that while Thomas Edison wanted to make money, reproducing music wasn’t what he had in mind when he invented the phonograph. And the list goes on ...


As you can imagine, there are many more discoveries and inventions that have made the United States and our world a more comfortable, interesting, and dynamic place. And these discoveries weren't tied to tax breaks or deregulation. Curiosity, environment, and simple need matter.

Whether it's national security (nuclear weapons), concern over health (medicines), the thirst for knowledge, personal pride, the arts, or simple accidental discoveries it's clear that tax breaks and deregulation are weak excuses for hijacking both the economy and the legislative process in America.

What Wall Street and our nation's bankers want today are specific guarantees on return to go along with their bailouts. This is especially the case when we consider that 30 years of tax cuts and deregulation have produced little beyond $14 trillion in debt, a collapsed economy in 2008, and wealth gaps that rival the Gilded Age. Indeed, after 30 year years of the GOP's tax cut jihad America ...

... has reduced it's revenue source to such a degree that we now owe $14 trillion, instead of the $979 billion when Ronald Reagan entered office.

... has refocused the economy so that extractive financial instruments, which rest upon up-front fees and larger than life bonuses, dominate the mind-set of America's shadow banking system and Wall Street.

... has made America lose sight of the fact that innovation, curiosity, and inventions aren't entirely dependent on tax cuts for the rich. They never have been, and we shouldn't believe that they are today.

I'll go one step further. Tax breaks and deregulation are now political poison pills that have recklessly reoriented America's economy and burdened its financial future.

Think about it. Our 30 year tax cut race to the bottom has become the GOP's way of using the levers of the state to push an innovative and inventive spirit that has always been with us. But instead of spurring wealth creating innovations Wall Street and America's shadow banking system have focused their energies on creating wealth draining financial instruments that have done little but create a largely "symbolic" economy dependent on taxpayer bailouts.

Today, only a handful of individuals on Wall Street have benefited from 30 years of tax cuts and favorable legislation. Yet, the GOP is calling for more of the same. Worse, the collateral damage has been so great that many believe human curiosity and innovation in America today are dependent on the very same state sanctioned tax breaks and legislative gifts that brought us the financial blow back we saw in 2008.

Somehow using the state to create an economy that benefits a few at the expense of the rest doesn't strike me as the best way for getting the government out of the marketplace. In fact, in many ways, it makes today's financial titans almost entirely dependent on the state for their financial fortunes. Let's call it their Orthodox Paradox.

Look, after 30 years of tax breaks for the rich and deregulation America should be swimming in jobs and be pretty much debt free (as Reagan promised tax cuts would do, but Clinton's tax hikes were scheduled to produce). Instead we are trillions in debt and have an economy swamped by growing wealth gaps and unemployment, both of which are a product of tax cuts and favorable legislation for Wall Street's financial mandarins.

At the end of the day, people demonstrate initiative and inventiveness for many reasons that go beyond tax brackets and legislative fits. Telling Wall Street and our bailed out bankers that they can hide behind the economic uncertainties caused by their policies - which collapsed the economy and primarily benefited them - is the height of insanity.

But we have learned one thing from the GOP's 30 year race to the bottom. They really don't have a clue about American history, or what motivates the human spirit.

- Mark  

Monday, September 26, 2011


Bank of America is being accused of cooking the books to hide potential losses of at least $10 billion. Yawn ...

If you've followed this blog, and read about Bank of America's faux paybacks ... or the wonderful world of book cooking Structured Investment Vehicles here and here ... or corporate America's evolving legal blame game ... Bank of America hiding $10 billion in losses shouldn't be a surprise to anyone. But I'm sure it is.

The only question now is how they explain and then bury the problem with some more creative book keeping.

And you wonder why market-to-market is so important for the banks ...

- Mark  

Saturday, September 24, 2011


Life imitates art. This the phrase we use when events in the real world mirror or seem to be inspired by creative work. Now we have this example of gamblers imitating Wall Street ...

The Justice Department is filing charges against online's Full Tilt Poker, claiming that it's really a Ponzi scheme that's cheated its players out of hundreds of millions of dollars.  The Justice Department claims that over the course of four years Full Tilt Poker's executives used $444 million of player gambling deposits - which were supposed to be protected separate accounts - to pay themselves millions. Specifically, federal prosecutors claim top executives Raymond Bitar paid himself $41 million and Howard Lederer received $42 million.

Gamblers imitating Wall Street ... this is the essence of what Bill Black meant when he wrote about "control fraud" in The Best Way to Rob a Bank is to Own One.

- Mark

P.S. Here's a thought. To be fair, Wall Street did imitate Vegas when it created and then collapsed our Casino Economy in 2008. Kind of begs the chicken/egg question, doesn't it? Twilight Zone here we come ...

Thursday, September 22, 2011


Elizabeth Warren, as I've noted here many times, knows what she's doing. This is what the social contract and the laws of justice are all about (mutual consent and political balance). Kudos to my friend Seven for finding this ...

“You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.

“Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”
Warren is running for U.S. Senate in Massachusetts against Scott Brown. You can bet that Wall Street will throw a ton of money at Brown. Warren is the real deal. I hope she wins.

- Mark

WHY THE MARKET CRASHED IN 2008 (in 10 easy to understand steps)

Arrgh ... If I hear one more GOP presidential hopeful blame our current market mess on President Obama again I think I'm going to have a brain aneurysm. To be sure, I understand the political part of what the candidates are doing. What gets me is how so many Americans buy into the ignorance and stupidity, and it's starting to burn through the electorate like wildfire ...

I bring this up because people speak as if President Obama could have somehow waved a magic wand and fixed the economy in just three years. Apart from having to deal with a "just say no" GOP, what they forget is that it took the better part of 6 years for the Bush administration and a GOP-led Congress to blow through budget surpluses and set the stage for burning down our economic house.

Destroying the peace and prosperity that was left to President Bush took some real effort and incompetence, and can't easily be undone.

So, in an effort to dispel any notion that President Obama is to blame for our current mess (though, I agree, he screwed up on bailing out the banks), I'm going to present what I hope is an easy ten point overview of why the market collapsed in 2008. What you'll see is that our current economic mess didn't happen over night, and won't be turned back over night either. I'm drawing the information straight out of my book. So if you want more information go out and buy my book (I know, shameless plug).

As you'll see, there's enough bi-partisan stupidity to go around, though one party definitely deserves more blame than the other for our current mess. You can quibble with the 10 points (I might even emphasize one point over another in the future), but the general outline of our market collapse, and what ails our markets today, are here.

Anyways, here goes. Our market collapse, in ten easy steps ...



1. A Naive Belief in "Free Market" Ideology (blinds policymakers)
... Ronald Reagan enters the White House after Maggie Thatcher becomes Britain's Prime Minister. Trickle Down economics is born. Deregulation, tax cuts for the rich, and globalization are embraced.
... After dumping trillions in borrowed money into the economy Reagan almost triples the national debt, raises taxes on the middle class (FICA), and lifts the debt-limit ceiling 17 times. Yet he's hailed as a fiscal conservative.
... In an effort to concentrate on  "free markets" in the 1980s, U.S. leaders effectively ignore economic costs associated with (1) paying for the defense of the west, (2) America's rude introduction to unbridled globalization (caused, in part, by the success of Bretton Woods), (3) the structural changes in the economy caused by the rise of financial services sector (i.e. the "symbolic" economy), (4) Nixon's price controls, and (4) OPEC's inflation inducing price hikes.
... Instead of dealing with costs of U.S. militarism, competition from abroad, the financialization of the economy, Nixon's price controls and OPEC price hikes, America's leadership blames sluggish U.S. economy on "the state" (regulations, domestic programs, and taxes), while calling for "a good 'ol shot of capitalism" in 1980.

BUILD UP: 1970s-1980s

2. Deregulation / Financialization  of Economy (regulator vacation)
... 1971 the dollar is de-linked from gold and becomes a commodity. Futures markets develop for money, interest rates, and other novel investment tools of the trade.
... OPEC price hikes wreak havoc on markets and prices. Pundits and foreign policy experts alike (see especially Henry Kissinger) are caught flat footed.
... new policies and deregulation pushed by financial services sector make the Savings & Loan debacle possible (1970s/1980s), and help to set the stage for the deregulation stupidity that eventually leads to the dismantling of the Glass-Steagall Act and the passage of the Financial Services Modernization Act (1999)
... financial services sectors consolidates as symbolic economy grows in importance. SEC begins its disappearing act.

3. Interest Rate Manipulation (what free market?)
... Interest rates are used first to stabilize markets, and then as a tool to stimulate them. Bailouts and money dumps begin in earnest under Alan Greenspan's leadership at the Federal Reserve. The Greenspan Put (dumping cheap money into the system when Wall Street gets in trouble) begins in 1987.
... Federal Reserve becomes Wall Street's support system, and then it's puppet.
... Market recklessness surges as financial services (and gambling) grows.

4. Yield Hunts / Secondary Markets (casino economy begins)
... Inflation + low interest rates in 1980s lead bond traders to start looking for higher yield investments.
... Non-traditional investment products become more attractive, but market players are (initially)reluctant because of low bond ratings.
... Globalization (largely unregulated) allows financial firms to seek higher investments abroad through loans, secondary markets, arbitrage, etc.

5. Bailout City (what, accountability?)
... Beginning with Mexico in 1982 (actually it begins earlier, but this is where I'm starting), Wall Street's stupidity is bailed out time and time again. The Greenspan Put begins in earnest in 1987 with LTCM.
... Accountability and free market ideology are undermined with bailouts, but no one cares. Wall Street/investment bankers continue to believe in the wonders of the market.

MANIA: 1990s / Aughts ...

6. Securitization / Derivative Markets Explode (hello Rumpelstiltskin)
... Market players become Rumpelstiltskin, and turn crap into gold. CDOs, SIVs, CDSs, and other novel investment products become popular, especially after ratings agencies get into bed with Wall Street's biggest investment banks. Interconnected market players game the system.
... Wealth extraction becomes more important than wealth creation. What would have been criminal or fraudulent before becomes modus operandi with favorable legislation.
... Security markets begin demanding more products (i.e. debt) to securitize, as rating companies begin to hand out AAA ratings on virtually anything that can be chopped up and modeled.
... Symbolic economy grows 30-40 times the real economy.

7. Toxic Market "Innovations" Applauded (herd mentality for rugged individualists)
... Wall Street (Goldman Sachs then-CEO, Hank Paulson) goes to SEC for permission in 2004 to carry 40:1 debt to equity ratios (Imagine going to a bank and asking to borrow $2 million on a $50,000 a year income). It's granted.
... With demand for securities growing, hedge funds, shadow banks, and Wall Street press Washington regulators to allow "non-conventional" lender packages into the housing market.
... Non-bank, or shadow banks, become critical cogs in financial machine. Subprime mortgage underwriters ignore all lending standards.
... With brokers dumping newly created loans 30-60 days after they're written, NINJA loans, No Doc loans, Liar loans, and other type of teaser programs become the norm.
... Caution thrown to the wind as competent regulators like Brooksley Born are buried politically (after she called attention to disastrous derivative markets), and Sarbanes-Oxley legislation allows Washington/Wall Street to say "See, we fixed it" after Enron. Free market praised as fraud & lack of oversight become the norm.
... Consumers borrow and use homes as ATMs, which give the illusion of prosperity.
... Personal debt climbs; Bush doubles the national debt. Bubbles and record profits grow.

8. The Federal Reserve / Congress Become Cheerleaders (casino economy goes Vegas
... Cheerleaders (who should be regulators) applaud innovative instruments and massive (unregulated) lending as evidence of the power of unrestrained markets.
... Home equity loans explode, consumption increases. Debt is the name of the game as it provides source for new securities and credit default swaps (insurance).
... Alan Greenspan cheers "new paradigm of active credit management" as interconnected institutions and the shadow banking system sign off on new securities, mortgage back contracts, and other debt instruments/loans.
... Wall Street and financial services sector pay and bonuses shoot through the roof.
... Notional value of contracts surge past $285 trillion (when annual GDP is only $14 trillion).

PAYING THE PIPER: The Mother of All Bailouts

9. Boom / Bust / Credit Freeze (back to reality)
... What do you know? Strawberry pickers making minimum wage really can't afford $700,000 home loans.

10. Blame Game Begins (continues today)
... Government Secured Enterprises (Fannie Mae), FHA loans, and Community Reinvestment Act (the poor) originally blamed for market collapse. Former Treasury Secretary Hank Paulson joins the game.
... George W. Bush (wrongly) claims he inherited a recession, and left with a recession. Nothing to see here. What a loser.
... Much anticipated bi-partisan FCIC report is blind-sided by GOP primer that deliberately excludes any mention of Wall Street, the shadow banks, interconnected cronyism, and deregulation (all the stuff I highlighted in red above).


The incredible thing is that we have now come full circle. Today, Republican presidential candidates are full fledged free market ideologues, pushing for more of the same policies that got us into our current mess. Don't believe me? Start at #1 above. Begin reading, again.

Only this time the banks and Wall Street are the only ones who have access to, and are profiting from, unlimited cheap money and our propped up casino economy. Think about it. Today the house of cards (yes, it's still a house of cards) is propped up by cheap money for Wall Street, deregulation for Wall Street, favorable legislation for Wall Street, and adherence to a failed ideology in Washington that keeps the trillion dollar bailout and QE money flowing, for Wall Street.

At the end of the day it took almost a full generation to reach our current level of market stupidity. It's not going to end under President Obama in one term. Especially with the GOP acting like a political boat anchor.

- Mark

Tuesday, September 20, 2011


Here's how you tell that it's class warfare ...

Why is it good policy when Republicans Jeb Hensarling (R-TX) and Paul Ryan (R-WI) say it's OK to raise taxes on Joe Six Pack - those hardest hit after 2008 - by letting their payroll tax cuts / deductions expire? 

But when President Obama says we can raise taxes on people making over $1 million a year - those who benefited most from post 2008 bailouts and the Bush tax cuts - it's suddenly class warfare?

And keep in mind that these are the same "job creators" who created 2.4 million manufacturing jobs abroad, while eliminating more than 2.9 million jobs here.

- Mark

Saturday, September 17, 2011


Have you ever wondered how something as serious as this ...

... could be hijacked and morphed into the functional equivalent of this?

Well, wonder no more. First, you start with the Bush Titanic ...

Then you sprinkle in some major blame shifting ...

... with true believer footsoldiers who look like this.

Then sprinkle in some major disinformation about taxes (and unemployment) when, as former Reagan adviser Bruce Bartlett made clear, the reality is quite different ...

Then you add in the continuous rants of media clowns like Rush Limbaugh, while stirring in Sarah Palin knockoffs like Michelle "Submissive" Bachmann and Christine "I'm not a witch" O'Donnell.

In the past we might have gotten something like this ...

Instead, because there is no longer a moderating force in the GOP, frontrunning Republican presidential candidates look like "Most-Likely-to-Secede" Rick Perry ...

So, to synopsize ...

Any questions?

- Mark

Friday, September 16, 2011


I liked this song before, but it's been turned into a real masterpiece. This is absolutely the best rendition of Unchained Melody I've ever heard:

This reminds us that it doesn't have to be original to be great ...

- Mark


This is big picture, long term stuff. OK, first the Good News ...

Good News ...
Because of advances in technology, innovation, and significant improvements in U.S. productivity, America's share of total world output has remained remarkably constant at a little more than 25%, despite the significant increases in output around the world, especially in Asia.

Bad News ...
With the rise of other national economies, our bloated national debt, and the slow collapse of the dollar, the world has slowly dropped it's use of the dollar for trade and as a store of value ...

So, are we on the right track given the rise of the rest of the world (since we're holding steady), or is something amiss?

We'll be discussing this in class on Monday.

- Mark

Thursday, September 15, 2011



In spite of recent bailouts, favorable legislation, and regular money dumps from the Federal Reserve, we don't have socialism in America. Not even close. This is the case even if you count government safety nets, which don't cost anywhere near what we've committed or disbursed to Wall Street since 2008 (at least $13 trillion). But if you're going to make the "socialism in America" argument this is how you might want to start .... 

In an effort to explain the logic behind market economics, in my book I tell the story of Russia's peasant economies after the October Revolution of 1917. One of the biggest problems Russia ran into was getting peasant farmers to produce. Things took a turn for the worse during Russia's Civil War (c. 1918-1922), when the nation was faced with frustrated revolutionaries and mass starvation. This was a critical moment since Russian revolutionaries wanted to sell surplus agricultural production to facilitate industrialization. But there were no surpluses.

While agriculture production increased with the introduction of the New Economic Policy in 1921, the program was abandoned by Josef Stalin and replaced with forced collectivization. Not surprisingly, agriculture production slipped, again.

To better understand why revolutionary peasants weren't producing surpluses - which were necessary to help fund industrialization - teams of anthropologists were sent to study peasants societies throughout Russia. This was a tremendous undertaking as it meant spending months, and even years, at a time in distant rural communities. But the findings were extraordinary.

Headed by researchers like Aleksander Chayanov, various institutes studied and learned about peasant societies throughout Russia. One key finding was that peasants would work until they had enough to feed their families, and not much beyond this point. As I point out in my book, they learned that subsistence peasant households didn't particularly care about wage or price incentives. Instead, for a variety of reasons (discussed in class), they focused primarily on the “use-value” of a good in the immediate term rather than its “exchange-value” in a market. Producing more than what they needed was viewed as “drudgery.”

Though the findings of Chayanov and others were instructive because they helped explain what was wrong with collectivization in the Russian countryside, they didn’t sit well with Stalin. He wanted to know how he could get peasants to produce. As a result, because of his own paranoia's and twisted world views, he saw the reports emerging from the countryside as an unwarranted defense of rich kulaks (productive peasant farmers). All he knew was that the revolutionary state demanded surpluses, and the peasants weren't producing.

Stalin saw traitors in his midst.

After Stalin took control of Russian agriculture the studies done by Chayanov and others were virtually ignored by the Soviet state, and many of the institutes were closed. But this was just the beginning. Repression and purges in the early 1930s were followed with large-scale disappearances of "non-revolutionaries."

Chayanov was among those branded a non-revolutionary. He was arrested, tried, and then shot on the same day in 1937 [photo below is not Chayanov].

In Stalin's world, the Russian revolution and the worker's paradise would be a success, even if he had to use the levers of the state to spin lies, send misfits to labor camps, or kill his political enemies (both real and imagined). This is where it gets interesting.

While Chayanov's story is instructive for what it tells us about peasant economies (and capitalism; a topic for another day), it's also significant because of what it tells us about Russian revolutionaries and die-hard Bolsheviks like Stalin. They were so committed to their theories of socialism that they would use the state - which was supposed to wither away according to Karl Marx, mind you - to make sure that agriculture surpluses were created and transferred to the more productive industrial sector.

It was deemed unimportant that the state became increasingly repressive as it forced collectivization on peasants, suppressed living standards in the countryside, and then transferred resources from Russia's agriculture sector to industry and the city. The needs of backward peasants could be put off.

Part of the rationale for this line of thinking was that Stalin believed peasants would soon benefit from the availability of manufactured goods, agriculture equipment, and other products that would eventually reach the countryside. As Cambridge economist Ha-Joon Chang points out, this was trickle down theory, Soviet style.

I tell this story because, as Ha-Joon Chang suggests in 23 Things They Don't Tell You About Capitalism, policymakers today who claim to be die-hard capitalists and free marketeers are actively using the state - which is supposed to stay out of the marketplace, mind you - to bailout Wall Street, facilitate money dumps when markets fail, and to rewrite the rules to suit the needs of a specific class.

At the same time, by using the state to pursue union-busting trade agreements (while doing little for labor), winking at weak immigration laws (which helps suppress prices and wages), and then ignoring collapsing wage and living standards for America's middle class, America's policy makers are acting very much like Stalin's Politburo.

They're even promising that by transferring wealth to a designated productive class that the benefits will eventually reach those at the bottom. And they've been doing this for the better part of 30 years, in spite of a history of spectacular failures and budget deficits.

Like Stalin's planning authorities, today's proponents and willing recipients of bailouts, money dumps, and favorable legislation understand the importance of using the state to create and transfer wealth from one sector of the economy to another. With more than $4 trillion disbursed, and a total of 13 trillion in tax payer backed dollars committed to Wall Street's collapse, you can be sure of this.

But this is precisely the problem.

As I point out in my book (Ch. 11), by using the state to transfer wealth to achieve market results (profitability), America’s bailed out and subsidized market players are on no firmer intellectual ground than the Soviet Union's Vladimir Lenin and Joseph Stalin. Pushing for and accepting government favors, while speaking admiringly of the wonders of the market, imposes an Alice in Wonderland character on modern markets in America.

Seriously, at what point do we stop using the resources and authority of the state to prop up failed banks, wink at market busting Wall Street schemes, and continue to believe in the value of disastrous trickle down market ideology?

- Mark

Wednesday, September 14, 2011



In my International Political Economy course today we spent a good deal of time talking about the interplay between economics and politics, and how both impact modern markets. Since some of it was a bit detailed, below is a brief outline of some of the topics we discussed in class. Those of you who are not in my class can read too  ;-)

In International Political Economy class this Monday we briefly discussed what happened when Congress created the 401k (tax deferred incentives to invest), and then encouraged, or allowed, other novel financial instruments to arrive on our economic stage. In the process Congress supercharged Wall Street's numbers, but what we really saw was the evolution and consolidation of what Peter Drucker called the "symbolic" economy, and what Kevin Phillips referred to as the beginning of the "financialization" of the American economy.

What did this mean for America? In a few words the American economy became increasingly dominated by trade in money, interest rates, futures contracts, and other "derivative" instruments. Trade in durable or manufactured goods has taken a back seat to these financial products. In fact, the American economy has been trading in these "symbolic" financial instruments to such a degree that they now represent at least 20 times (and perhaps 40 times) what we will produce and trade in the "real" economy this year (about $15 trillion).

In plain speak - and as economist Joseph Schumpeter might have put it - we are now living in a world where America's economic mandarins are playing monopoly rather than building them. This is the biggest difference between the Robber Barons of the past and our Robber Barons of today.

The Carnegies, Morgans and Rockefellers of the 19th century built steel mills, railroads, and other real industries which created real wealth. If they went bust at least they left railroads, steel mills, and other industries of substance. Not so with today's financial wizards. The Robber Barons of the 21st century are financial zombies bent on extracting rather than creating wealth. It's really that simple.

We can see the impact of America's economic transformation because of the increased emphasis on the financial sector, and because how more and more of Americans are seeing their wages squeezed (see graph below). Unfortunately, this has forced many Americans out of the middle class.

At the same time Americans are watching their incomes collapse Wall Street has focused on safeguarding their empires of paper wealth, and finding new ways to pump up the market. This is one of the reasons we have seen a plethora of financial instruments created and traded. Not surprisingly, total volume traded on the NYSE has exploded since 1982 ...

As should be expected, with every fee-laden trade, and with every new expanded portfolio managed, Wall Street's financial mandarins have gotten increasingly wealthier. This explains, in part, the growing wealth gaps in America.

But volume isn't everything. There's also this. Every time Wall Street's financial wizards created new ways to trade and then collapse the economy, Congress and the Federal Reserve have stepped in with an assortment of bailouts, money dumps, and favorable legislation to save their bacon.

While many Americans don't understand the details of any of this, one thing is clear: Our economy is increasingly built around, and dominated by, fuzzy financial instruments that take many shapes. The financialization of America's economy is part of what we'll be looking at in class this quarter. We'll be doing this at a global level too.

As an example of how the financialization of the economy works in the United States we can look at home mortgage loans and other debt contracts (student loan, credit card debt, etc.). Specifically, when we look at what's happened to mortgage contracts we find that they are no longer single documents holding all the information you need to know about a loan. Instead, home mortgages (and other debt contracts) are sold, bundled up with other mortgage contracts, and then resold as a collateralized debt obligation (CDO) security.

Today most mortgage contracts that are bundled into securities and sold can only be understood if you can decipher this ...

While these mortgage backed CDOs make money for market players the thing to understand is (1) how these CDOs created the environment for deregulation and shoddy lending standards, among others, and (2) how these CDOs pushed the financial industry, and our shadow banking system, to ask for more (shady) debt contracts.

These contracts lie at the heart of what brought the economy down in 2008.

The fact that we did little to fix the problems that caused the meltdown after 2008 help us understand how much power and influence the financial sector has in our economy, and why our next market collapse will happen. Also helping us understand how our new economy functions is that, while all of this has been going on, the vast majority of Main Street has seen their wages decline since 1980 while the financial sector has seen their compensation soar ...

Two key components of this new economy include the wonderful world of "derivative" markets and our extremely important "shadow banking" system (which GOP FCIC members pretended didn't exist in their 2010 report). If you can find the time, try and read the links.

These topics are among the many issues we're going to be looking at this fall. I'll have more to say about derivatives, our shadow banking system, and our symbolic economy as we move through the quarter.

- Mark